Monday, January 31, 2011

For those of you accustomed to the bloviating of the political class, the accusatory finger pointed at the evil speculator should not be unexpected. It's an indication that the politicians have generated inflation in an environment where the common man doesn't want it, and they need to find a patsy to blame. But blaming the speculator is as truthful, honest and fact based, and claiming that the markets turned them into a newt.

Villains are so easy to create when it comes to inflation because people don't really understand where it comes from. But they know exactly where a rate increase comes from, and that's why we get inflation. For pols and central bankers, it's the path of least resistance. It's easier than doing something like raising rates, which would be just as unpopular, but would be harder to blame on others.

Among the others available to take the blame in addition to nameless 'speculators' are 'hedge funds', 'the derivatives market', 'foreign interests' (usually someone politically unpopular - American in the middle east - China in America), 'Wall Street bankers', 'Goldman Sachs', and 'the Jews'. None of them will be responsible for the problems created by politicians or the price shifts caused by inflation, but they have historical proven politically useful in taking the blame.

And in spite of the history, politicians continue to show no embarrassment at renewing that particular witch hunt because this time....(say it with me gang) ... it's different.

As an aside - how any Jew in America can be anti-firearms ownership continues to utterly astound me given their history. You would think they know better.

Sunday, January 30, 2011

My buddy (and frequent commenter) Vishnu just sent me a little snippet from an Indian newsource he keeps track of online. I have no idea if this is the right view to take, but it's interesting that it's the view being taken by at least a portion of Indians:

Comparisons between Obama and Carter are old hat in my sewing circle, and Vishnu is a part of that. Our mutual friend Karl gets a big kick out of taunting me with Carter references because he knows my deep and abiding love for America's worst president. I was disgusted by Carter long before it became fashionable, and my annoyance has been the subject of much entertainment for all of us over the years. But this is the first time I've seen that comparison being made by the international community, who Obama's supporters all claimed should now love us.

The American media is wrong all the time. I don't see that the Indian news media should be any better simply by virtue of being Indian. I personally think the Tel Aviv Stock market is a better way to gauge the goings on in Egypt. Surely if things look to take a seriously anti-western turn, they would be the first to know. And the last reliable data I got from my contacts in the energy trading community (who all follow the middle east pretty closely) was that it could just as easily go pro-west as not.

But it's interesting that when it comes to Obama and Carter, the resemblance is getting easy enough to spot that even foreign news services are catching on.

Nicholas Kristof needs to feel better about himself, and he has a host of childish new laws he’d like to see enacted in order to prove it. They won’t make you any safer, or improve your life in any way – but they will give the authorities the tools they need to arbitrarily force their political views on a percentage of the population. And since that view matches Kristof's, he naturally thinks that would be great. As usual, he’s not worried about the effect of these laws at all; only their intent. That’s right – liberals are thinking about gun regulation again.

A crazy person shot some people in Arizona, so Kristof thinks it’s time to start infringing on the rights of the non-crazy. He compares guns to cars and claims that we have made cars incredibly safe through regulation. It’s not true of course, and the data doesn’t support it. 40,000 Americans die in cars every year - far more than the 1,500 who are accidentally killed each year with firearms. (Which by the way is also far less than things like swimming pools and bicycles.) But it sounds good when he says it. And since that’s enough for the average NYTimes reader, I suppose it will now become a part of liberal self congratulatory dogma.

But if he really wanted to make a good analogy to gun regulation, he should compare gun regulation to regulating the use of fire instead.

Suppose the anti-fire lobby wanted all uses of fire regulated. They wanted you to have to register every fire making device you owned and only use it in government approved ways. You could only turn your stove on three times per day. If you turn it on more than that you are guilty of a crime punishable with 3 years in prison per additional use. And in an effort to aid compliance with the ‘common sense fire law’, the government can mandate timers that will automatically prevent that dangerous ‘4th usage’.

They can mount a breathalyzer on the stove and make it only turn on when you are sober. Or they can make sure it will turn on only during those hours of the day when the least fires are started. If that means you have to cook your dinner at 3:45 in the afternoon - so be it. It's really for your own good.

They can prevent your furnace from turning on at an unapproved time as well, and mandate that you only heat your food, your water and your home to certain temperatures. This will have the additional 'social benefit' of reducing your carbon footprint. Fire kills thousands every year after all, and does billions in property damage. It’s only common sense that we have some ‘reasonable regulation’ of it.

And how about portable lighters and matches? The government recognizes that some people might need them in pursuit of their jobs – but a person should only be allowed to buy one per month, and should have to demonstrate a ‘clear need’ to a judge in order to carry one on their person. They should all be registered of course so that if a fire starts we know who to hold accountable. And anyone who sells matches or a lighter to a child or other ‘unauthorized persons’ should be punished to the fullest extent of the law.

Toward that end, maybe the govenrment can 'invest' some tax payer money in new technology to make a lighter only work if the thumb on the lever has the right fingerprint - or maybe we can customize the material that the lighter burns so that it will leave a 'tell tale' forensic tag in the soot of an unaccounted for blaze. And matches can all be stamped individually with a permanent microscopic serial number so when they're found at the scene we can determine who to arrest.

Naturally we should keep a list of people who the government feels are incapable of handling the responsibility of dealing with fire. The people on that list should simply move someplace warm and make it a point to keep lots of blankets in their house. The mentally ill should be on that list naturally. In fact, lets put ‘global warming deniers’ and Sarah Palin voters on that list too while we’re at it. We all know how crazy they must be right? After all – it’s just ‘common sense regulation’ of something that scares the pee pee out of liberals. It’s only ‘common sense’.

Honestly, it’s really tiring fighting the same fight with self satisfied ‘know it alls’ like Kristof. How many new ways do I have to figure out to say the same damned thing? How many times can they make the same idiotic mistakes (which others always have to pay the price for) before they finally learn?! Well they haven't yet I suppose so let me put that all important paragraph here:

Passing a raft of new gun regulations will not make anyone any safer. Criminals and the crazy are the ones who use guns to hurt people and they don’t give a rat’s patootie about your idiotic laws. This model of decision making where you punish the innocent in an attempt to effect the guilty, does not work. It’s never worked in the past. It still doesn’t work. and it's not going to work in the future. Ban any damned thing you want to and the people who commit crimes will still get them - or make them - or steal them. It makes no sense at all to try to control the actions of a few by limiting the (constitutionally protected) rights of the many.

Seriously – can’t you all just get your heads out of your butts for the two seconds it would require you to learn that one simple lesson? Honestly Kristof (and all you other people who think gun bans work) … just grow the F#@! up would ya?! It's not common sense, it's stupidity that ignores the facts and the data. It may make you feel better, but making you feel better about yourself should not be the basis for social policy.

Friday, January 28, 2011

But if I'm going to be honest about it, I'd probably have a problem with it if this kind of anecdotal evidence were being provided by an anti-gun activist to justify new social policy. As a general principle, I don't believe you should base the rules on the outliers. So even though I agree with the conclusions that Verbruggen arrives at (that NJ's hyperbolic gun restrictions are unjust) I don’t think it would be right for me to give his methods for reaching them too hearty an endorsement.

The world is imperfect. So whatever the law, there will always be people who shouldn’t be punished who are, and people who should be punished who are not. I don't see any way around that. So in my mind it's far better to base laws on what will work best for most people, and to use objective science as the judge. That would be better I think, than crafting policy based on whatever the judges 'feel' is best at any given moment in time.

So although I'm not crazy about the 'rule by anecdote' process, in the interest of showing support for a more rational set of gun laws in New Jersey, I thought I’d throw out a few suggestions based purely on what is likely to make NJ citizens safer vs. what will only make the politicians (and antigun activists) ‘feel better’.

1. Repeal The Assault Weapons Ban

In the history of our Democratic Republic, no law has been more baseless and thoroughly unjustified than this one. It literally makes it illegal for a gun to look scary, no matter whether it is actually more dangerous than any other weapon. As testimony to it's utter ineffectiveness, I myself own both an AK47 (actually a Romanian WASR) and an AR15 (actually a rock river .223) both of which are guns the law's designers wanted to ban. Both of my weapons are 100% in compliance with NJ law, and still look as terrifying to an anti-gun activist as any firearm that the ban actually covers. So in fact, all the law really does is provide an arbitrary and pointless way for local law enforcement to harass gun owners if they are politically inclined to do so.

There were never many crimes committed with what the law refers to as "Assault weapons" (like much else in the bill - that's actually a misnomer), so it won’t have a great effect on public safety one way or the other. But we should repeal the law anyway because it proves with such stunning clarity, that the legislators who passed it are a bunch of illiterate imbeciles. They should be embarrassed that such an idiotic law is on the books, and the should repeal it immediately out of embarrassment if nothing else.

2. Repeal The Hollow Point Bullet Ban

The hollow point bullet ban was enacted during the media hyperbole about ‘cop killer’ bullets. In a error filled media campaign typical of the antigun movement, legislators and other activists falsely claimed that hollow point bullets were more dangerous than other kinds of bullets because they can ‘pierce through body armor’ and were ‘designed to kill rather than injure’. The fact however (and when I say fact I mean ‘FACT’ as in – a consensus view supported by ALL of the objective scientific evidence) is that hollow point bullets are MORE likely to be stopped by body armor not less.

The science is really beyond debate here. There is no reason to ban hollow point bullets except as part of an incremental policy to restrict firearm ownership. It does provide another tool for the political harassment of firearm owners. But like the laughably misnamed 'assault weapons ban', it too does absolutely nothing for public safety at all.

Since the ‘hollow point’ ban was passed, the political wind has changed in America. It was originally offered as part of an incremental strategy leading to a complete firearm ban, but since the supreme court has already ruled that unconstitutional, it should now be repealed. there is no longer a reason to prevent the law being brought back in line with the scientific evidence.

3. Allow Concealed Carry

As it stands, there is no law prohibiting the issuance of a concealed carry permit to private citizens in New Jersey. But in what amounts to a civil liberty tragedy, a purely procedural ban has been in place which has prevented the issuance of a permit to any private citizen for over 25 years. The only exception has been to retired police officers and armored car guards.

There are volumes of data which clearly indicate that allowing law abiding citizens to carry concealed weapons actually reduces crime rather than increases it. It raises a question of safety in the minds of potential criminals and therefore discourages them. And that means that the current law is putting the citizens of New Jersey at greater risk than they would otherwise be if the procedural ban were eliminated.

Better would be for the state to embrace the evidence, and begin to allow even a small number of permits to be issued. The state can require safety training or that applicants pass a test. They can make the permit costly enough to exclude all but a few applicants. But to continue to arbitrarily deny NJ’s citizens the right to defend themselves is contrary to their safety, and in all likelihood a violation of their constitutional rights.

4. Punish Criminals Not The Innocent

My final suggestion for changing New Jersey’s gun laws is one that even anti-gun advocates will probably get behind. We should DRAMATICALLY increase the penalty for using a gun in the commission of a crime. Anti-gun advocates have long supported only those positions where the innocent and law abiding are punished instead of those that actually commit crimes. But the rest of America has already realized that law abiding gun owners are not the problem, and New Jersey should do the same.

If anti-gun activists would focus on punishing criminals instead of making all gun owners into criminals, it would be an encouraging sign of rationality.

Spain is held up as a model for our green future - where they've imposed the "necessary" regulations on traditional energy sources, and spent the "necessary" subsidies on their green alternatives. Everywhere you look it's windmills, solar panels and self satisfied socialists, anxious to preach to you about how they're saving the earth by "caring" and you're an evil imperialist bastard because you don't.

But when you look under the hood at how all this self satisfaction changed things, you see that all that really happened was that they raised their overall cost of energy as compared to their output, and that crushed their economy. It's had exactly the same effect as it would have if they simply banned the use of fossil fuels, and required everyone to 'pay' for their electric usage by mounting a generator on a stationary bike, and pedaling it 5 hours a day.

Costs have risen, output has fallen, and for every green job they saved or created, they lost 2 in more traditional (dirty) industries. Hooray for the Earth! If only we had such far sighted leaders who 'care' as much as the Spanish. Then again, it's tough to 'care' about the earth when your life is in a shambles and your kids are going hungry.

Spanish culture is very different than American culture. Like most Europeans, they are more likely to accept ill treatment from their leaders than we gun toting - god clinging Americans. But with necessary caveats stated, it looks like we're going to get a test of that axiom about how rioting happens at about 20% unemployment.

Wednesday, January 26, 2011

If you've been watching Glenn Beck then you know who Frances Fox Piven is. She's the aging socialist co-architect of the progressive strategy for destroying the American system by overloading the welfare state. She's openly called for rioting in America, and has bemoaned that the American unemployed aren't as prone to violence as their Greek or British brethren.

Glenn Beck called special attention to her in a recent TV broadcast, and it's got the left all rattled. Now they're circling the wagons around her in an attempt to normalize her image as a grandmotherly academic instead. They are doing their best to re-brand her and her message and to minimize her calls for violent overthrow of the government (for which she has tirelessly campaigned for the last 40 years).

Rather than detailing the idiocy of her position, let me grant it as an axiom, and then speak for my own little slice of heavily armed America.

Ms Ehrenreich, you say that because I'm armed that I am by definition, a tyrant. You claim that your fear of my firearms makes you too terrified to riot on my street, burn my house, and harm my family. By being able to defend myself, I interfere with the 'right' of you and your socially disgruntled brethren to sack or destroy my belongings. And that by rejecting the claim of the collective on myself, my family, and my property, I'm infringing on your 'rights' to the same.

Well if owning firearms makes me a tyrant, then you should take comfort from the fact that I am a benevolent tyrant. Leave me alone, leave my family alone, and leave my property alone and you'll never even know I have firearms. If the simple fact that I have them makes you afraid to disagree with me, then I think you should find a way to address your irrational fears, but it's no real business of mine.

Being a firearm owner doesn't make me any more violent than anyone else. On the contrary, it proves that I've been considerably less violent than many. And that can be easily confirmed by the vigorous criminal background checks I undergo in order to remain a firearm owner.

While my firearms don't make me any more violent than anyone else, you should be aware that they do raise the cost of violence committed against me. Riot on my street, assault my house with Molotov cocktails, or threaten my family in any credible way, and I make no promises for peaceful dialog.

Put me in a position where I believe that I or my family are facing imminent harm, and however noble you think the motives of the mob, I will absolutely respond with violence. And I believe that any free man rightly would. So if it's a tyranny to proclaim that I am a free man and that I do not recognize the right of anyone (let alone a mob of protesters) to commit violence against me or my family without responding in kind - then yes, I am absolutely a tyrant. And I will remain one to the day I die.

If that frightens you for whatever reason, then I think the world is a better place while people like you remain frightened.

How many times can you write an essay explaining economic illiteracy? Frankly, it's exhausting. It's gotten so I turn the volume off everytime another Democrat comes on the TV (although when it's people like Anthony Wiener or Debbie Wasserman Schultz I often leave it on for the comedy value). But the problem with standing by and let Democrats make the same mistakes over and over again is that it's never they who pay the price... it's us.

It's hard to find a more economically illiterate pol than Jennifer Granholm. She's been breathing union helium for so long that precious few of her brain cells have survived. And the images you can see of the jewel in her crown, Detroit, obviously show that. That Obama would like to make all of America more like Detroit is obvious from his policies. He simply ignores the down side of top down thinking and omnipotent labor unions.

It's the same old tired left wing thinking that has put NJ at the forefront of the 1970's. America thankfully won't be fooled by this nonsense, but he introduced it anyway to make a statement. So on behalf of the people who continued to elect his increasingly calcified but still "funky" behind to the Senate, I'd like to make another statement and formally apologize for this implicit insult to the intelligence of all Americans. I know you're not stupid enough to fall for it. And I apologize for allowing Senator Lautenberg to make the fact that he feels otherwise known so publicly.

When you think of Frank Lautenberg moldering along in the Sentate, we in NJ hope that you will also remember that we are the home of future president Chris Christie.

Tuesday, January 25, 2011

The talk bubbling up about the State of the Union address is that team Obama wants to focus on ‘investment in innovation, education, and competitiveness’. As a guy who ‘invests for a living I find that to be breathtaking arrogant given the government’s history at picking winners and losers.

To believe that the only way we can be competitive as a nation, is by ensuring that team Obama’s campaign contributors manage to get all they can from the government Teat, is insulting. They could just as easily say that we’re going to go into business as the world’s supplier of $5,000 dollar toilet seats (in fact that would be more honest). How exactly does it help our global competitiveness to make sure that GE has enough in tax breaks, incentives, and a high enough regulatory barrier to entry, to make sure it has no competition in any business deemed ‘essential’ to US interests?

Education as the government does it, makes us less competitive not more, and they don’t know anything about innovation except maybe how to stifle it by protecting the swamp smelt or spotted owl. How can they believe that it’s rational for us all to continue to throw good money after bad on the three things that government does worse than anything else? Even social security is providing a negative return for many people, and how can investing be easier than that? Bernie Madoff was a crook but at least he had positive numbers as the bottom line for his Ponzi scheme.

The truth is, the only way that America can stay competitive is if we get our big government and the gaggle of social engineers that justify them out of the way of private industry.

The government only has one way to motivate people and that’s force. If force will work as an incentive, then the government should do it. Jails, courts, armies – these are the things government should do. It may do them badly, but it’s still their appropriate role. And until people can innovate better with a gun to their heads, government should stay out of the ‘investment’ business.

Monday, January 24, 2011

This is my 1,000th essay on this blog – for whatever that’s worth. So I'm feeling the urge to look back a little at it's synthesis and progress. Please forgive me if I ramble a little more than usual.

I had lunch last week with a few friends, one of which does pretty much the same thing I do, and he said he was amazed at the amount of written output I generate. When I told him that it only takes me about 10% more time to write these things than it takes for him to read them, and that I generally publish them replete with spelling and grammatical errors he seemed to understand a little better.

I make no claims to be a great writer. I have friends who write for a living, so I know the difference. And while my prose may be halting, most people will grant me that I know what I know. I’m an expert in my field – even if that field is just a tiny fraction of the world. I usually restrict my writing to those subjects where I feel my expertise matters. For the most part that’s the economy and guns – my work and my hobby. And in both those cases you’re hearing from a guy who has had something to lose if he’s wrong. I personally think that makes all the difference in the world.

Paul Krugman writes about the economy – or at least he used to. But even at his best, Paul Krugman never had any “skin in the game” so he never learned the costs of being wrong. And because that’s so, he’s gone from being wrong about just a few things, to wrong about virtually everything. Barbara Streisand writes about the economy, and so does Jane Fonda. Whoopie Goldberg does as well. All of them have as much stake in the results of their thinking as Paul Krugman does, and it’s had the same effect on them all. On that topic, as my mother would say, not one of them can find their hat with both hands.

Whereas, if my ideas are wrong then 90 days from now I’ll be unemployed. In fact, I’ve been a maximum of 90 days from unemployment for a good chunk of my career. That isn’t an indictment of me, it’s a recognition of the realities of a job where risk is a constant. There is no stability in your life when you do what I do – it simply goes with the territory. But the upside of that is that you can bet that I know tons more about how the economy really works than Whoopie Goldberg or Paul Krugman. I can’t carry a tune (actually I couldn’t even carry it in a bucket) and I don't look good on camera – but I can tell you how to increase GDP or lower unemployment. And the reason for that is that I can tell the difference between different kinds of knowledge and ideas.

As he gets older, Tom Sowell looks more and more like Yoda to me. I hope he takes no offense at that – I certainly mean none. He never struck me as a particularly vain man where his appearance was concerned, but I can’t imagine anyone enjoying the physical comparison. But the similarity is really more internal than external. Like Yoda, I view him as the ancient master of the mind whose every utterance includes some irreplaceable gem of wisdom. He’s one of the last guardians of the Jedi school of Chicago – which seems to be cranking out more Sith than Jedi these last few years.

Dr. Sowell’s masterwork ‘Knowledge and Decisions’ continues to be the most under appreciated economic text ever written in my opinion. And the reason you can tell I’ve read the book is because I know the difference between a ‘fact’ and something that is an opinion. Everyone has all kinds of opinions about all kinds of topics – but facts are harder to come by. Opinions may or may not withstand the test of external verification – Krugman’s almost never do. But that is one of the requirements for an idea to be described as a ‘fact’.

The advocates of the leftist world view would have that be different. To them, opinions may be just as important as ‘facts’ – it really depends on whose opinion we’re talking about. If it’s the opinion of someone with a great deal of political power, then their ‘opinion’ may be even more important than a ‘fact’ which contradicts it. To them the ‘wrong kind’ of facts can be (and morally should be) ignored, but the opinions of ‘the right people’ should be elevated to the level of scripture. And as you can probably guess, I don’t think that’s any way to run a country. I’ve heard Dr. Sowell say the same thing.

Someone once asked him why more Economists don’t support central planning, when that central planning would mean a great deal more power for economists. As you can imagine he didn’t take to the idea. He rightly said that the reason central planning fails is not because the people who do the planning aren’t smart enough, but because it’s impossible for any one person however smart, to know enough to do it correctly. If Dr. Sowell were to have a ‘use the force Luke’ tag line, that would probably be it.

But if he had embraced the idea of central planning for his own sake as one of the planners, he’d have ended up sounding just like Paul Krugman. Krugman’s ‘rent seeking’ behavior is obvious to us who have the training to understand the choices he’s making. And because of that, no one in my world takes Krugman serious as a thinker anymore. His view on economics, markets and tax policy have become just as self deluded as his view on the “rightwing” media. And for those of us with skin in the game, they hold as much weight as the views of Whoopie Goldberg or Barbara Streisand.

Dr. Sowell on the other hand continues to produce work which has the objectively verifiable ring of truth. He’s out there in the ‘back of beyond’ intellectual swamps of northern California showing people how you can levitate the GDP with nothing but your mind if you just focus on what really counts. And the way he says to do that is the same way he always has – by focusing on the mysterious force created when you grant individuals their economic liberty.

OK – I’ve stretched that analogy a little further than I probably should have – I’m sure you get the point. Like most things, economics can be used both to illuminate and to blind. Sowell does the former, while Krugman does the latter. And the easiest way to tell the difference is to ask a simple question. “Who gets to decide?” If the policy being advocated is implemented, then who makes the decisions? Who gets the choice?

If the people empowered to choose are bureaucrats and politicians, then it won’t lead to greater economic growth but the growth of government. If the person who gets to choose is some economist somewhere then it will lead to greater central planning and the inefficiency that comes with it. But if the people who will be making the decisions are individual people, and they are empowered only to make decisions about their individual lives – then that will be better for everyone, and the economy will grow in the process.

And if all anyone ever learned about modern economics from reading this blog was that – then even master Yoda would probably tell me that I’ve done well.

Friday, January 21, 2011

Liberals don’t get economics because it’s not as simple as they are. “If people are poor” say liberals, “then lets take money from the rich and give it to them.” It has a ‘let em eat cake’ sort of simplicity and elegance, so they put no more thought into it than that. But when they follow through on their plan, it hurts the character of the poor by making them dependent, and it hurts the rich because they could otherwise do productive things with the money that liberals are wasting making the poor dependent. It’s an old story really.

For liberals this is really standard fare. But that isn’t to say that there aren’t some economic issues which are so counter-intuitive that they defy popular instinct for conservatives as well. Tax rates go down and revenues go up; conservatives typically understand that where liberals don't. But I’d like to call attention to a few others which seem to be a bad idea in principle (and in fact probably are in most cases) but in reality they will only help us given our present situation.

The first is inflation. We are conditioned to hate inflation, and rightly so in the broadest sense. But “some” inflation right now would actually firm up our global position and make a complete collapse of our system less likely not more.

A ‘collapse’ of the American system can only come from a crisis event. The scenario envisioned by most is a run on Treasuries which causes the Fed to support the bonds, and that subsequently causes a run on the dollar. But if we let some level of managed inflation occur, then the thing that will rise most precipitously if food. Nowhere in the world does food represent a lower portion of the average wage than in America. It’s really our last area of total global dominance.

So as food prices rise across the globe, it will destabilize the emerging market long before it begins to affect stability in the US. That will mean that if a liquidity crisis were to occur in the capital markets for whatever reason, people will be more likely to run toward the US dollar instead of away from it. In other words, allowing a degree of ‘managed’ inflation will reinforce the US market in comparison, and make a total collapse less likely.

The second is the ‘bail out’ for the states. Several states have problems which can’t be solved by normal cuts in spending and management of tax rates. I feel like I’ve discussed why ad-infinitum, but if Rip Van winkle is reading this, it’s their pension liabilities which are doing it, and it’s the bluest highly unionized states that are in trouble.

The first conservative reaction to the fiscal distress is shouts of ‘let em default’. Austerity and personal responsibility are watchwords of the conservative movement and are important to the 'Tea Party' as well. Even the House of Representatives is considering a resolution against any 'bailout' for the states, and if it’s adopted, it will all but guarantee that someone somewhere will be entering the legal limbo of state bankruptcy.

But to give more evidence to the axiom that the first instinct isn’t necessarily the best, that ‘let em default’ emotion is precisely the same one held by most liberals. Default, under the present law, means the bond holder only. And according to liberals, it's they alone who should be asked to take the hit. “We have a contract" they say "and that must be honored come hell or high water.”

But if if they are, then not only will services have to be slashed dramatically, laying off union staffers in the process, but taxes will need to be raised enough to kill whatever economic growth we’re expecting. And forcing the default on the bondholders exclusively will also make it impossible for the states to borrow money in the future at anything like a reasonable rate. Some aggregation of capital is necessary in government, so a greater portion of future taxes will have to go to debt service than is currently the case. If this happens, then very little government is about to become VERY expensive.

There are steps being taken to change the law – and the real solution will be a negotiated settlement of all parties involved. But it’s ironic how the conservative instinct for fiscal austerity will only aggravate the problem. The thing that conservatives will typically strive for – a growing economy and rising market with stable prices – would be best achieved with some level of federal assurance for the financial markets. It can even probably be managed without any real dollar cost to the taxpayer. But both liberals and conservative are in open revolt over the prospect.

I can't believe I'm shoveling snow again - what is this Minnesota? I use one of those power snow throwers which makes it easier than doing it by hand - but it's still plenty of physical work.

Ive had to do it so often lately that I'm halfway tempted to just sit in the house and wait for the town to plow that 6 foot high pile of ice at the end of my driveway before I even get started. I'd swear they do it for spite. I've had to undo their handiwork a minimum of twice per storm so far this year. I swear if I'm out there when they plow in my perfectly clear driveway again I'll be tempted to violence. Damned illiterate civil servants.

I guess this will have to be my vengeance though. Those bastards are going to lose their pensions. How do I know this? Think of it this way.

Right now the law says that States have no legal way to escape their obligations, but their future obligations cannot be paid. We are at a Keynesian endpoint where there is no more 'external source' of capital with which to make up their shortfall caused by top down inefficiency. So, as I've been saying for ages, the law is going to change. Now we have an idea of how, and even the NYTimes is trying to find a way to break the bad news.

So when it's settled, we'll have two groups of people who have unsecured claims on future government revenue. The first will be the union pensions, and the next will be the investors in the municipal bond market. The first will have no choice but to deal with the government, and the second - lots of choices. In fact, unless we're going to abolish the free flow of capital, the bond holders will be in a much better negotiating position going forward, simply by virtue of being able to walk away.

In the end, the pols will be forced to choose between much higher borrowing costs, or placating the public sector unions. They will see that as a choice between saving the unions and saving themselves. And what that tells me is that the civil service unions and their overly generous pensions are about to take a major, un-lubricated @$$ f^cking. (I can't even type that without smiling.) So while I'm out there watching the dim witted public servants plowing in the end of my driveway for the 10th time in 2 weeks, at least I'll have that idea to keep me warm.

Leftists proclaim themselves the guardians of 'Fairness', but I believe the markets are the ultimate arbiter of 'justice'. And when the pols have no choice but to make accounts balance, all the self congratulatory motives in the world won't keep them from doing what they must. "You can't do that to us!" the unions will say. But short of forcing people to invest in Muni's, the unions will be the only people they CAN do it to.

Which means that short of my driveway being plowed in again, god is in his heaven - and all is right with the world.

Thursday, January 20, 2011

Here’s a pretty good piece on how the Democrat’s future is tied to the future of the public service unions. As you can imagine, that’s not where I’d want to be if I were them. As I’ve said a thousand times, the purpose of a union is to increase costs and lower accountability in spite of any economic realities. They also increase unemployment and lower productivity, and through it… GDP.

If you’re a political party and your stated agenda is to "put people back to work" that is not the agenda that you want your closest partner to have. I say partner – but "owner" would probably be a better adjective since the Democrat party costs the labor unions hundreds of millions every year – far more in a presidential election year. They spent 85 Million alone getting Obama elected, and for that kind of money, they have to be considered an owner.

And since the unions have come up, I’ve been thinking a lot about what the state collapse will look like. It isn’t a question of avoiding collapse anymore. Even the things that the most responsible politicians are doing are all stop-gap and won't prevent an ugly ending.

Across the scope of reactions, on the more delusional side you have Illinois, where they expect a 66% tax increase for businesses to inspire them to rush out and hire people. This isn't paying your mortgage with your credit card, it's paying your crack dealer with it, and leaving the mortgage (and for that matter the grocery bill) unpaid. A plan like that will decimate economic and job growth in the state, and won’t actually raise the money they need in their projections. It will also miss by more for every year as companies flee to more tax friendly environments.

On the other more "correct and ambitious but unlikely" end of the spectrum, we have our own Chris Christie. The path he's taking looks terrifying to politicians, but it's actually a better bet than the alternative. He’s trying to make meaningful reforms to the way government works in NJ across all segments - he's even going after tenure for teachers. But I’m beginning to think he’s doomed to failure. I’m a supporter, have no doubt. But he’s made so many enemies, and the voter demographics in NJ are such that a non-union candidate starts with a 17 point disadvantage at the polls.

He’s popular with taxpayers, but the unions so despise his that when it comes time for his reelection they’ll send mobs of pipe wielding thugs out to batter geriatrics before they let him remain in office. I expect obviously photo shopped pictures of him sodomizing horses on the front page of the Newark Star Ledger. As Election Day approaches there will be unexplained fires at polling places forcing them to be relocated to unannounced locations. And boxes full of votes will be disappearing (in Republican districts) and reappearing (in Democrat districts) with such speed and regularity that you’ll think the election is being held in a Harry Potter movie.

The upshot of all this is that Christie will have only one term to reform the state, and that’s a mean feat even for a miracle worker.

Then between the Scylla of NJ style reform and the Charybdis of the higher taxes we're seeing in Illinois, are the boy king of New York Andrew Cuomo, and the antiquarian hippie of California, Jerry Brown. I don’t think much of either man personally, and they both seem to be living up to my low expectations. Neither of them seems to be taking on the long term challenges in any way. Instead, they’re making stop gap measures that will hold the house of cards together a little longer in the hope that an opportunity to fix things will present itself somewhere down the road.

But things aren’t going to get better, they’re going to get worse, and the road is a dead end... with a cliff just past the barrier. So even with slashing current compensation and future benefits, the demographics of their unfunded pension liability is still going to put the states into receivership. Real reform enacted today might prevent the total collapse, but that's the direction Christie is trying to take, and there is no reason to believe the political situation in NY and CA will yield better results. In reality, the longer they wait the smaller the chances it can be resolved.

Eventually those pensions run out of money. When it does, the unions will insist that the issue goes to the courts and the state is presented with a bill to make up the gap in benefit outlays. That's the point at which Cuomo and Brown will say ‘we have no money to give you’. Then the fireworks begin.

The more I think about it, the more I think the issue of the default resolution will be settled politically. The Feds aren’t going to let some judge somewhere decide an issue with such long term consequences for the country. And I don’t think it will go well for the unions overall. To give them what they will want we’ll have to suspend reality. You cannot tax a free people at the levels that will be required in order for government to meet their demands. We'll be in full out financial crisis by then, complete with rioting and teargas. So I don't believe the pols will simply let a judge call all the shots.

2015 or so is the absolute drop dead date. There is no reason to believe the kind of tepid economic growth we're seeing will be nearly enough to avoid disaster. And that disaster will be all but certain sometime between now and then.

Friday, January 14, 2011

When they said 'go big or go home' they were absolutely talking about Chris Christie. He's going after the jewel in the crown of 20th century organized labor. Tenure - the rule that guarantees permanent employment for every dues paying teacher.

The national teacher's union, the NEA, has already announced that a complete nationwide strike of every teacher in America would not be off the table in defense of tenure. Christie is right of course, and the American public knows it. But most teacher apparently do not. If it isn't overwhelmingly obvious, public school teachers are big on 'taking offense' but not very big on smarts.

The situation in Europe continues to deteriorate, but the citizenry have no illusions about being able to control the way it plays out. So instead, they treat it all like the joke it is. From Galvez - temporarily toiling away as a missionary in the wilds of darkest academia:

It is a slow day in a sunny little Spanish town. The sun is streaming down and the streets are deserted. But times are tough, everybody is in debt, and everybody lives on credit.‬

On this particular day a rich German tourist is driving through the town, stops at the local hotel and lays a €100 note on the desk, telling the hotel owner he wants to inspect the rooms upstairs in order to pick one to spend the night.

The owner gives him some keys and, as soon as the visitor has walked upstairs, the hotelier grabs the €100 note and runs next door to pay his debt to the butcher. The butcher takes the €100 note and runs down the street to repay his debt to the pig farmer. The pig farmer takes the €100 note and heads off to pay his bill at the supplier of feed and fuel. The guy at the Farmers' Co-op takes the €100 note and runs to pay his drinks bill at the bar.

The bar owner slips the money along to the local prostitute drinking at the bar, who has also been facing hard times and has had to offer him "services" on credit. The hooker then rushes to the hotel and pays off her room bill to the hotel owner with the €100 note. The hotel proprietor then places the €100 note back on the counter so the rich traveller will not suspect anything.

The traveler comes down the stairs, picks up the €100 note, states that the rooms are not satisfactory, pockets the money, and leaves town. No one produced anything. No one earned anything. However, the whole town is now out of debt and looking to the future with a lot more optimism. And that, is how bailouts work.

My experience is that when it comes right down to the push and shove, liberals are all physical cowards. They won't stand up unless they have a huge mob behind them. And I'm sure Sarah is perfectly capable of defending herself against them. Good thing too.

I just wanted to drop a shout out to my all time favorite politician, former Louisiana Governor Edwin Edwards, who I wrote about briefly, way back here. Ed epitomized everything about southern Democrat politics and the politicians if fostered. He was charming, funny, and as quick witted as any man who has ever served office. He was also hopelessly corrupt, so he's also been in Federal prison in Texas for a few years on a bribery and extortion conviction. He got out yesterday.

I personally tend to be tolerant of a little corruption in politicians. None of us is perfect and what do you expect them to do? It's not like it's a rarity, so there must be some incentive in place that leads to corruption. So if we give them enough power to exploit it, then it's probably our own damned fault - we shouldn't be surprised.

I'm not saying they shouldn't be jailed for it, of course they should. But so long as they handle it with the kind of style that Ed did, once he's paid his debt to society I'm as willing to forgive as the next man. So good luck to you governor. Please try to keep out of trouble.

If you believe (or say you believe) any of the above then you are demonstrating your inability to think logically. And if you do it in front of me expect to hear some violent rhetoric at high volume... at the very least.

At the moment, I'm as worried about the fiscal views of the Tea Party as those of the left. I was telling the wife yesterday that I feel like a doctor trying to explain to a heroin addict, that withdrawal can kill you too - so you need to get clean, but ease into it. Little chance of that happening in Chicago though.

They're going through enough fiscal heroine to make Kieth Richards look like a Mennonite.

Tuesday, January 11, 2011

In an effort to gain some political capital from the Arizona shooting and advance his goal of punishing the innocent and law abiding everywhere, Frank Lautenberg has once again emerged from his crypt to propose yet another gun related ban. This ban will apply only to those citizens willing to obey the nation's laws. So while law abiding civilian gun owners, hunters, and other sport shooters will all be burdened with the expense and inconvenience of complying with yet another gun law, criminals and the crazy, like Jared Loughner - the man who committed the Arizona shooting, will not be effected by it.

Although no criminals or schizophrenics could be reached for comment, we can't imagine that the existence of one more ridiculous gun law for them to ignore, will bother them in the least.

So the real problem is not that Conservatives were unjustly accused of aiding and abetting a mass murderer absent any evidence whatsoever (and ignoring all evidence to the contrary) - the problem is that they won't agree to the point and let it gel into 'common knowledge' without saying a word in their own defense.

Sunday, January 9, 2011

It's been about 24 hours since the Arizona shooting and after watching several hours of network news the only thing I can tell you for certain is that while she may not have personally pulled the trigger, the media is pretty sure that Sarah Palin had something to do with it. (Meanwhile back in reality, Ms. Palin has expressed her condolences to the families involved like many public figures, But apart from that she has no absolutely connection to this shooting in any way whatsoever.)

I know - it sound surreal to me too. But according to the mainstream media and all the liberal outlets like the Huffington Post and the NYTimes, since she was loosely connected to the graphic above during last year's election, she was personally culpable in some small way for inciting this nut case to violence.

I've looked at that image pretty carefully and I can't see anything that would lead a rational person to that conclusion. After looking at if for some time, it never instilled in me any desire to grab one of my semi-automatic pistols and go on a killing spree. I still have no greater desire to throw off any perceived 'yoke of oppression'. It didn't set off any deeply buried 'manchurian candidate' style blood-lust, or fill me with the desire for murder and mayhem. In fact, it doesn't speak to me in any secret code at all. It's just a little picture of the US, with some graphics on it. Typical election stuff really - no big deal at all.

To me what this really looks like, is another case of liberal fantasy congealing into the standard mythology of the Democrats, and then being overstated by their echo chamber as if it were already a demonstrated fact. It's a common phenomenon for simple minded people like them to reduce things like this to caricature so they can understand it. And it's pretty clear that the liberal media had their villains picked out before the first shot was fired. Liberals really are psychotic when it comes to Palin, and this is just more evidence of that.

To me the kid who they've arrested for the shooting sounds like a genuine loon; the kind of guy that everyone should be afraid of, not just congressmen. I mean - among the people he shot and killed was a 9 year old girl. How can that possibly be politically motivated? How can that be motivated by anything at all except dementia or some other psychotic mental aberration?

The answer is - it can't. And if the congressman that he had shot had been a Republican, then that's precisely what we'd be hearing from the media right now. But instead we get all this hyperbolic nonsense about how horrible conservative speech is, and how Glenn Beck and Rush Limbaugh must be the 'root cause'.

Even if it were politically motivated (which at this point I doubt), to them it couldn't possibly have been the behavior of the Democrats over the last 2 years which incited his anger, it can only be the fact that some conservative somewhere complained about it afterward.

The truth is, I don't really blame the news teams for trying to be 'first' and being wrong because of it. I heard a guy on Foxnews yesterday claim that it was probably a 'fully automatic' weapon because so many people were shot in the head. To anyone whose ever fired an automatic weapon that was obviously untrue, but those guys are getting all kinds of information behind the scenes and sorting through it in real time, so you have to cut them some slack.

But this is business about blaming Sarah Palin because of that image is just nuts. And attaching it to Glenn Beck or Rush Limbaugh is a demonstration of a serious mental illness if you ask me.

Jeez people - are you really seriously making this claim? Aren't you afraid that people will see you as hyper-political imbeciles? I know I do. Grow the F -up.%%%%%%UPDATE%%%%%%%%%

I'd also like to come out right now as being firmly in favor of violent rhetoric, because our choice isn't between good words and bad words. More often than not, our actual choice is between violent rhetoric, and actual violence. And I, like most people who have had genuine violence in their lives, can tell the difference between the two.

Saturday, January 8, 2011

As I write this, (5:10PM Saturday, Jan 08, 2011) the Arizona shooter has been identified by name and his Youtube page has been found, but little else has been confirmed about him. And even though there has been no public explanation of his motives (apart from some lunatic ramblings of a Youtube video he posted) none of that is holding back Paul Krugman.

We don’t have proof yet that this was political, but the odds are that it was. She’s been the target of violence before. And for those wondering why a Blue Dog Democrat, the kind Republicans might be able to work with, might be a target, the answer is that she’s a Democrat who survived what was otherwise a GOP sweep in Arizona, precisely because the Republicans nominated a Tea Party activist. (Her father says that “the whole Tea Party” was her enemy.) And yes, she was on Sarah Palin’s infamous “crosshairs” list.

Just yesterday, Ezra Klein remarked that opposition to health reform was getting scary. Actually, it’s been scary for quite a while, in a way that already reminded many of us of the climate that preceded the Oklahoma City bombing.

You know that Republicans will yell about the evils of partisanship whenever anyone tries to make a connection between the rhetoric of Beck, Limbaugh, etc. and the violence I fear we’re going to see in the months and years ahead. But violent acts are what happen when you create a climate of hate. And it’s long past time for the GOP’s leaders to take a stand against the hate-mongers.

Not shame, nor reason, nor lack of evidence will restrain him. He immediately jumps to conclusions about the cause of this shooting, and then publicly names the people he views are at it's root. Personally, I'm horrified, both at the crazy man in Arizona, and the one at the NYTimes.

Friday, January 7, 2011

Liberals in the State of Illinois are proposing a BREATHTAKING income tax increase to try to close the hole in their budget without putting it to the unions. When they do, Illinois voters will abandon the place is unprecedented numbers. (Since the dead traditionally vote Democrat, I expect they will be willing to stay where they are.)

I've been saying that we need to stop acting like children and deal with the fiscal reality; that we need to address our public finance insanity in a way that gives confidence to the markets. This is a good example of the 'acting like children' part.

In NJ we have Chris Christie saying the right things and doing his best. He may fail - it may not be possible after all for anyone to succeed. But he's trying. In Illinois, they are just pretending that this is the same old story. They still think they can get away with business as usual.

I think I'm going to start placing ads for some of the real Estate we own in Florida in the local Chicago papers. If they are going to flee, I see no reason why my family shouldn't profit from that.

I was having an email conversation with an opinion journalist who shall remain nameless (because I didn't clear this with him). We were going back and forth about the impact of inflation and he said that he was concerned that if we didn't get ahead of the issue, we were going to have a public debt crisis. I told him we already have one.

For the last 15 years or so, I've worked exclusively at 'Macro' hedge funds. My Resume includes names like Caxton Associates and Moore Capital, which along with the 7 or 8 other firms that are their peers, are all considered to be 'powerhouses' funds. But even at their largest, they typically have something between 15 and 20 Billion dollars under management, no more.

In fact, the industry legend is that Paul Tudor Jones helped his friend Louis Bacon start Moore Capital by referring those investors he was turning away from his own Macro hedge fund (for lack of capacity) to Louis's firm. I don't know if it's true anymore than anyone else - but it is a story that people tell. Anyway, 20 Billion seems to be a magic number in the Macro hedge fund space, and if you are managing more money than that your returns seem to suffer for it.

In the meantime if you look at this link, you'll see that the Federal Reserve has purchased more than 6 billion dollars worth of US Treasuries, on at least 12 of the last 30 days. On that pace, it would have taken them roughly three and a half days to have become one of the largest hedge funds in the world.

Sometimes I hear a talking head say that things must be (good/bad) because of what interest rates are indicating. But with the Fed buying that much of the issuance, the interest rates aren't telling anyone anything except that the Fed is open for business. The question that I and many of my peers are asking ourselves is not 'what do interest rates currently tell us', but 'what will happen to interest rates when the Fed (operating as the worlds largest hedge fund) stops buying bonds?'

I'm not saying we shouldn't be doing QE, on the contrary, I believe we should. What I'm saying is that if you think it will be painless for them to simply 'stop', then you're dreaming. The event that must be avoided at all cost is a run on the dollar. A run on Treasuries should be avoided too, because there is an excellent chance that it will lead to a run on the dollar. But without QE, we would very likely already have had one or both.

QE is buying us the time to undo some of the systemic fiscal problems with our public finances. It's working as far as that goes. And if we now act like grownups and address the fiscal insanity, then we can all go on more or less as we are. If not, then with QE in place the odds about 50 - 50 that we face economic oblivion. Those are bad odds because there are a lot of problems. But without QE I believe oblivion would be certain, so I'll take 50 - 50 any day.

Thursday, January 6, 2011

Hyperinflation isn’t a monetary phenomenon, it’s a political one. Inflation – now that’s monetary. But even a statement as simple as that one seems to ruffle a ton of feathers. Have a look at this post by Kevin Williamson. He rightly says that inflation causes high prices and not the other way around. But, if you read the comments there are a lot of smart people who adamantly disagree with him.

A good friend of mine who specializes in energy development projects and manages hundreds of millions of dollars in private equity feels exactly the same way. Keep in mind, he isn’t some academic with no stake in the game, arguing the minutiae of the CPI scoring or debating the semantics. This is a guy with 20+ years experience managing both his own money and the money of others in the capital markets. He’s made a fortune for himself over the years and billions for his investors. And he insists that you can’t have ‘inflation’ without rising wages. My counter argument to that was – tell it to the Chinese.

Milton Friedman, from whom I take my view, claimed that inflation was exclusively a monetary phenomenon. The money supply increases and prices will rise to adjust for it. “More money chasing fewer goods” is the one liner they used back when I was learning about it. And by that definition, Kevin Williamson is absolutely right about global inflation in commodities. I think he’s wrong about that being a “global no vote” on monetary policy, but that’s a different topic. As for inflation, he’s dead right.

Mind you, doing something about it is another story. When economists are trying to set policy they like to exclude food and energy because the prices of those items are much more volatile. Lots of things can increase oil or corn pricing even without inflation being a factor. So since they try to look long term when setting policy, economists have been trained to exclude the volatile items from the index in an effort to exclude their non inflationary effect. Violence in the Middle East may raise oil prices, but you don’t necessarily want to change your monetary targets because of it. The markets are not sealed in a bubble, and mathematically isolating the cause and effect of price movement isn’t completely possible, especially for more volatile items.

So inflation is a monetary phenomenon, but hyperinflation really isn’t. Let me illustrate with a little thought experiment. As of December 10th, 2010 the current M2 (the ‘money supply’) was about 8.3 Trillion. Allowing for some definitional liberty, lets call that all the ‘dollars’ currently printed. Suppose the Federal Reserve chose a day when all markets were closed and where no other news events occurred to announce a change in the target of M2. Suppose on the next business day they were going to expand their balance sheet until M2 was equal to 16.6 Trillion – twice the current number. What do you imagine would happen to the value of a barrel of oil, or a bushel of corn, or a gold coin? In other words, by that metric what would ‘inflation’ be?

Well there is a quantitative process for determining that, and the starting point for it would be to double the ‘price’ of everything denominated in dollars. That wouldn’t be the only effect. The markets will also take into account the reason that the Fed made that decision. They would look at the why’s and where’s of the decision making process in an effort to determine the probability of them doing it again - or undoing what they just did. They’ll discount that probability of further action in either direction, and the markets will overshoot or undershoot the “double” number by the consensus of that estimate. From there it might also include additional ‘error’ based on deleveraging or momentum, or lots of other things. But that would be the basis, and inflation over that period would be something like 100%. That’s VERY high, but it’s not hyperinflation.

My point is, even if the Fed did something as dramatic (and deranged) as doubling the money supply, absent other input it wouldn’t mean that we descend into hyperinflation. Inflation would be stratospheric, but we wouldn’t see the breakdown of confidence in the process without additional data. This is because hyperinflation is really an issue of discounting. It happens when market participants look at how the decisions are being made about the money supply and conclude that they aren’t being managed in a rational way. They then lose confidence in what amounts to the political system making the decision, and the currency is devalued to infinity.

Saying that a monetary system isn’t being handled rationally isn’t the same thing as saying that you disagree with how it’s managed. Whatever politicians say, the markets clearly believe that the Fed’s process for deciding monetary policy is thoughtful, considered, and based in reality. In fact, even if you put Howard Dean in charge of the Federal Reserve (if you can think of a public figure whose economic view is more fully divorced from reality than Howard Dean I’m open to alternatives) he will still be constrained by a functioning political system. And those constraints will tell market participants where the limits of his craziness will be.

I’m not saying that it’s impossible for the US dollar to hyper inflate. I can imagine several circumstances that may cause that sort of consequence. But none of them will be Ben Bernanke’s fault. Printing money won’t do it, only dysfunctional decision making will. And in the case of the US, that decision making would have to convince the global markets that there is no way for us to return to a rational fiscal policy. (For more detail on that see my previous post) But given the stake holders (and what they will do to our politicians if they continue to act like children when the next crisis comes) I think it’s unlikely to happen. Possible – but I’m betting against it.

But to put it off on Ben Bernanke and the Fed is to misunderstand the role of the money supply, and the nature of inflation. The truth is, inflation and hyperinflation are really two different things. A good analogy is that inflation is like the common cold while hyperinflation is like hemorrhagic fever. The common cold is a nuisance, but it’s rarely fatal for those who are basically healthy, while hemorrhagic fever kills the fit and unfit alike. They are both illnesses, and both can involve a fever. But there is really no reason to believe that one will inevitably lead to the other.

Wednesday, January 5, 2011

I’ve gotten a few questions via email about what I mean by ‘a bailout for the states’. ‘bailout’ covers a lot of ground so I think it’s fair to address.

What I mean by ‘a bailout’ is that the federal government is not going to sit by and let California, or Illinois on New York simply default on its debt and push all those unionized civil servants out onto the unemployment lines. They will not see the prisons thrown open - the guards all dismissed, or allow the state to descend into anarchy. When the money runs out they will be involved in the process of what comes next, and use their influence and power to help smooth the transition from where those states start, to where they end.

What form the ‘bailout’ actually takes will be subject to negotiation. The unions (employees), the politicians, the debt holders and the pensioners will all be involved in the discussion. There is no doubt in my mind that the state government will be far smaller after the negotiation than in will be before it. The unions won’t like that, but taxes can’t realistically go as high as they would need to make up the shortfall.

Taxation is really a model – the numbers aren’t absolute. As the rate rises the revenue rises but there is a diminishing return. And eventually increasing the rate simply reduces the economic activity and doesn’t generate more tax revenue. The states that are in the most trouble are all near the higher end of the Laffer curve, so there will be no more tax revenue for them. Government cuts will be in the offing, and civil servants will be expected to take some pain.

There is also little doubt in my mind that the debt holders will have to take a haircut. The financial markets and pensioners won’t like that, but if there isn’t enough money to pay employees, then there certainly isn’t enough to give the bond holders 100 cents on the dollar. But the capital markets will prevent the decision makers from forcing all the pain on the bondholders because that would lead to contagion and another collapse.

In that regard, if things look to go really badly, the Fed will act as a stopgap. They’ll buy up whatever debt they feel is necessary to preserve the present liquidity level (better described in this case as the leverage multiple) of the broader markets, using their balance sheet to prevent a liquidity collapse. They’ll buy however much of the debt is required to keep the crisis from spreading. In that way, the US taxpayer will be on the hook for all of it, at some level. No one will be presenting a bill to them at this point – but they will be guaranteeing the broader system. And that is the real ‘crisis moment’.

At that point, the finances of the state will be taken away from legislature, and be addressed by the courts. Hopefully that will mean that grownups will finally be in charge, but you never really know because there is a small legal hiccup in the whole thing. The problem is that states don’t presently have the facility for managing a bankruptcy. As an example, at present there is no way for them to legally cut pension payments at all. Under current law they are on the hook for 100% of all promised payments.

That won’t happen though because the money has to come from somewhere. If the pensioners are to be made 100% whole then the State’s Bonds will be forced to default. And since the pension holds those bonds and the bonds of other entities which will lose value along with a State default, the pension value will collapse. So they can either negotiate something with the bondholders where the pain is shared, or they can force the bondholders to take the hit alone, and be the very next in line to suffer. The people who run pensions aren’t that stupid.

The place where the Feds will be forced to step in is in the gaps between projections and results. No one, for instance will be able to give a clear idea of actual tax revenue when the state emerges from its crisis. Much of the mathematics of the welfare state is circular. Paychecks are issued to state employees, who are then taxed, and the resources used to hire more employees, who are taxed, and the resources used for more… etc. The effect of all of that can be estimated, but with so much of the State’s future revenue and expenses up in the air, forecasting cumulative economic activity will be sketchy and uncertain. The Federal government will be asked to give assurances to stakeholders to make up any shortfalls and to convince risk takers to stay in the game.

The country as a whole is also a stake holder in the future of a state like California or Illinois. A healthy vibrant California for example, is as much an asset to the country as its present incarnation is a liability. So the question is: what’s something like that worth to you? Surely it’s worth something, and in the process of negotiation, we’re going to find out exactly what that is. That’s the amount I would expect the US taxpayer to inevitably be on the hook for. But the alternative isn't likely because it's not really in our interests to let New york, California or Illinois sink.

The thing that concerns me most is that the people on the left in this argument are factually wrong about how economics works. The things they believe (or at least the things they say they believe) simply aren’t so. They ignore the contradictions of their positions and the way their worldview always seems to require some ‘external asset’ to feed the system. Redistribution of wealth doesn’t lead to greater economic growth, it leads to less. And when we reach this point in the process, a view like that will no longer be a viable talking point.

If they come to the table like Howard Dean - all talking points and no logic or reason to support it, then the global markets will rightly lose confidence in our ability to act like adults. That will be what turns an orderly if somewhat weakening dollar into a hyper-inflating dollar. Like I’ve said before, the only real way for us to avoid the abyss is for the economic education of the American left to outpace our fiscal descent. It’s time for the boomer left to finally grow up and face reality. It really can’t be put off or avoided any longer.

One last comment - a Bailout for the State Pensions would essentially be the same as a bailout for the states since under present law, there is no way for the states to forgo their commitment to the pension system. My understanding is that if the pensions run out of money to make payments, the state is legally obligate to make the difference up from tax revenue. The unions will see that enforced in court so that kind of event will simply put us back at the top of this post. It will follow the same path from there.

Jonah Goldberg has a pretty good piece up about praising politics and divisiveness as being a part of the solution. It’s a common theme with him and he handles it in his typically thoughtful way. As much as I can’t stand politicians I can see his point. Politics is awful, but the alternative is violence. And while the good guy - bad guy simplicity of that may sound appealing compared to the ‘knife in every back’ nature of political decision making... the truth is that it really isn’t.

The central political divide of our country has to do with finance and economics. Liberals (or progressives or whatever) believe that the best way to handle an economic crisis is with top down, ‘command and control’ sort of policies. They think you should give experts a gun and let them decide for the people instead of telling them decide for themselves. Tax ‘the rich’ to pay for benefits for everyone else, and on the whole the world will be a better place.

Personally I think the evidence that contradicts that is completely overwhelming, but it’s been around a long time and hasn’t convinced any of the progressives.

In the meantime, more or less since Reagan, conservatives have supported the idea of economic liberty as a path toward prosperity. Republicans (particularly those in office) have been more self serving, but the conservative ideals they claimed to hold all included the idea of increased economic liberty for the little guy and a smaller government with limited responsibilities.

Things have remained the same for liberals for a while. They still hate the rich, and still think ordinary people are too stupid to run their own lives. But since the housing crash, the conservative side of the discussion has changed in important ways. It now includes a lot of economic populism, mostly revolving around the Fed. Ron Paul thinks we should disband the Fed and go back on the gold standard. A commodity based currency has its virtues, but it won’t lead to a lack of inflation as many believe. In fact, the gold standard may cause at least as many problems as it solves. The unintended consequences will be broad and deep.

There is another idea rattling around having to do with the federal debt limit. The image being painted is that the car is speeding toward the cliff at 100 miles per hour and refusing to raise the debt limit would be like slamming on the brakes. The problem is that’s not a very good analogy. A better one would be that the car is speeding toward the cliff at 100 miles per hour and refusing to raise the debt limit would be like getting out of the car.

A default on US debt would be the result of failing to raise the debt limit. And we shouldn’t pretend that something like that isn’t serious. And all the tricks and trifles in the world won’t save our economy after something like that. Unemployment would skyrocket and economic growth would evaporate.

But most important, it won’t actually help. It won’t lead to more economic liberty. In fact, it’s entirely possible that it will lead to martial law, strict price controls, and rationing of essentials. The world that comes from a default on US debt will look more like 1984 than if we elected a whole law school full of Obama’s to public office.

We aren’t saints in the private sector, but in many respects honesty is still considered a virtue. It’s usually in our interest to mean what we say and vice versa. Not so in politics and I think that’s what screws people up. Politics is almost exclusively about lies, deceit and manipulation of others. The most honest man in congress is almost certainly the least successful.

So if all this noise is about the debt limit is just politics and posturing, then that’s fine. I was making this case to a coworker yesterday and I was trying to explain the kind of forces that will be brought to bear if it looks like the discussion will go badly. “Just imagine” I said, “George Zoros’s tough guy dangling Obama out a third story window by his ankles, and in the window beside it, some lobbyist from the political right doing the same to John Boehner. They’ll make a deal.”

They will make a deal because everything they are depends on it. In the post default world guys like our politicians aren’t worth much of anything. So they'll make a deal just ot protect their own ...positions.

Tuesday, January 4, 2011

I just watched an unbelievable clip from the Star Ledger's Brian Donahue detailing Chris Christie's most outrageous moments. I can't say enough about how awful it makes him look... not Christie, Donahue. At the moment NJ.Com isn't making the clip available to link, but I'll post it here when I can. In the meantime if you want to see it you can go here.

Here's the actual video now:

Let me say a little about the points Donahue is 'horrified' by:

First: Governor Christie Called NJ's teachers among the "most privileged" people in in our society. Donahue is shocked by this yet after just 3 years and 1 day teachers have guaranteed employment for life and even make jokes to journalists about how they can't get fired. They get guaranteed free medical care forever from the same date. They work for 9 months but are paid for 12. They have no real accountability of any kind and a union that not only owns outright one of our two political parties, but would sooner see the state government in ruins than give up even a single pay raise. As a guy whose never made a penny without earning someone else two, and having never been given any kind of a guarantee of anything - that sounds pretty priviledged to me.

Second: Governor Christie says that if you don't like the way things are being done in Sayreville, move. For this one, Donahue includes a spit take and implies that Sayreville is a prison that can't be escaped from because Westfield has a higher average income. There are literally dozens of NJ towns with similar cost of living and similar demographics to Sayreville, several of them right in Middlesex county. Many even border on Sayreville. Any high school kid probably already knows this but Brian Donahue doesn't. (if you want to know their names Donahue look them up yourself...if you know how to read you stupid fu3k).

The fact is, we in the real world are always forced to make choices where there is both a cost and a benefit. Moving is a big hassle, but if the sports program is that important to you and you can't convince your school system to cut something else, then moving is an option. Grow up Donahue you A-hole.

Third: Donahue is upset that Christie is claiming to have 'solved the 2010 state budget crisis' without making the (optional) payment to the state's civil service union pension plan. He compares it to solving your household budget while failing to pay the mortgage, but it's really like doing so while failing to give your kid his allowance. (Or at least it would be if your kid's allowance was 3 Billion dollars a year).

I don't know if Donahue is just trying to be cute, or clever, or maybe the editors demanded that he put together a 'video hit piece' and this was the best he could do. Maybe he's thinking that there is no such thing as bad publicity and any criticism of Christie will earn him points in the progressive journalism business no matter how thin they are. I know I certainly didn't know who the hell he was yesterday.

But if he actually believes this is controversial stuff then I now know that he's an imbecile. And I know that as is typical of the NJ Star Ledger he's hyperbolically partisan. And I know not to take him seriously as a journalist at all anymore.

Used to be a journalist could pop out a spit take laden piece of refuse like this and get nothing but kudos if the target was right. Thankfully at least those days are gone. Spread this one around guys - it's illustrative of our 'objective' media.

Two editorials about organized labor caught my eye this morning, one in the Times and the other in the Journal. At first glance the journal piece is the more sophisticated – the Times piece is the same old leftist pro-union clap trap. (Oh wait, the Times piece isn’t listed as an Editorial at all. They think it’s hard news. I wonder how a mistake like that could have happened.) But the Journal piece raises the issue that the private sector unions are suffering because of high unemployment and they are beginning to see the strong public sector unions as at least a part of the problem.

This is pretty much true to type as far as the NY print daily’s are concerned. The Times is self congratulatory dribble while the Journal is technically correct, but a day late and a dollar short. Notice - neither piece raised the issue of a labor union’s effect on unemployment (it raises it) or it’s effect on business growth (it reduces it) or outsourcing offshore (raises) or entrepreneurship (reduces). Still, it’s informative to watch this ‘new’ information flow through the major media. Over the next week or so, Fox News will be talking about the battle between public and private unions while ABC, CBS, NBC, and CNN will be talking about the evil republican politicians who are looking to undermine ‘the working man’. MSNBC will still be blaming George Bush for everything bad that’s happened since Charles Martel won the battle of Tours - but every court needs a jester I suppose.

I don’t have time to get into it today, but I’ve been working through some numbers. There is a well founded belief (not proven to my satisfaction yet mind you – but there is supporting evidence bubbling up and it’s embraced by people who’s judgment I trust) that no matter what you set the tax rate at, you can’t hope to siphon off more than 20% or so of GDP in taxes. If you grant that as an axiom, and you look at the combination of the interest on our present debt and our unfunded liabilities, then the only way we come out of this without a default at the federal level will be to radically transform the tax code to increase economic growth. I say ‘radical’ because I don’t think Congress is capable of the kind change required. It would involve a massive give back of economic liberty to the individual, and roughly half of congress (and all of the Whitehouse) still believes that’s the wrong direction to go. By the time we convince them of it, we’ll be 2 years further along at a minimum, and the change required by then if we want to keep things afloat, will be even more dramatic. for that reason it still might not be possible.

We need the economic education of the American left to outpace our descent into the fiscal abyss. History tells us that's unlikely. But they can either they wake up and smell the coffee today, or tomorrow they can wake to the smell of the house burning to the ground.

%%%%%% UPDATE %%%%%%

I'm in Greenwich today so I'm watching Bloomberg TV (although by now you'd think I know better). Bloomberg TV has all the hard hitting news content of CNBC (well - maybe not quite as much), but with hotter chicks. They just went on for 10 minutes about the serious financial crisis that's ravaging America's... higher education system. It seems that in spite of tuition rates that have VASTLY outpaced inflation, the universities can't seem to find enough money to meet their needs. Unionized professors are retiring and taking expensive and luxurious packages and free medical care for life while their indentured grad students are forced to do all the work for little pay. This reminds me of something I've read somewhere, but I can't seem to recall what.

Bloomberg TV hasn't been able to deduce a cause for this mysterious fiscal wreckage yet - but when they finally do (I'm betting in a year or so), I'm sure it will have something to do with George Bush.

Monday, January 3, 2011

A peculiarity of NJ's political and economic landscape is that schools are funded exclusively through property taxes. And in order to make things 'fair' and thanks to something called 'Abbott Districts', the state takes money from some school systems and gives the money to others. They do this at the command of the courts who controversially ruled that they, not the legislature, should be the arbiter of what is 'fair' when it comes to school funding.

In dollar terms this has always meant that vast sums of money are taken from the suburbs where the property taxes are highest, and given to the school systems in Camden, Newark and Paterson. Once there, the political insiders in those areas either steal, lose, or waste as much of it as they possibly can. No one in America can squander money like a Camden School superintendent. And thanks to the Abbott districts, they had some real money to do it with.

And while the Abbott money flowed into union coffers and the hands of corrupt officials almost as quickly as school officials flowed into the state's prisons, the education of children in those areas remained substandard. Their testing scores continued to be dismal when compared to the suburbs that funded them, and the student population in general and showed no correlation to the money spent by command of the courts. In other words - it didn't help at all.

Last year when Christie was trying to keep the ship of state from going under, he slashed state education support - including some of the spending that the state is supposed to do as the grand arbiter of the Abbott wealth redistribution. And in spite of the fact that it helped education not at all, and that school officials in the Abbott districts are being sent to jail almost as quickly as State Legislators - a progressive group is still suing the state, trying to compel them to hand over the suburban cash.

Expect the press to come down on the side of the poor downtrodden 'underprivileged', whose NJEA officials are forced to get by with a poolside condo in the Caribbean instead of one on the beach side. They will wail and moan that it's 'unfair' and demand that the suburban taxpayers be forced by the courts to hand over 'their fair share' of what someone else wants. If you watch the local media, there will be little doubt that it's the greedy suburban taxpayers (who want to fund their own schools for their own kids) who are the villains here.

The real question though is whether the State Supreme court believes in unicorns. If so, they will promise one to each and every child (and NJEA member) in Camden, Newark and Paterson - the same as they always have. And to pay for those unicorns, the state government will have to cut things that they are REALLY supposed to be doing to fill the funding gap. If the progressives win this one Christie will have to cut police, courts and other 'essential' services. If he doesn't win this one, (and the courts have no incentive to let him) then that's when the REAL pain will begin.

This will not be the last battle of it's kind we'll be seeing. Remember, bankruptcy is settled in the courts as well.